Why I’d buy this red hot FTSE 100 stock and a small-cap growth play today
It’s been a tough year for investors in Majestic Wine(LSE: WINE), whose stock trades 45% lower than a year ago. This is a familiar pattern across the retail sector, but a resurgent Next(LSE: NXT) suggests some of the bad news may be overdone.
Nothing to wine about
Today offers some respite for vino supplier Majestic, with sales and profits up for the crucial Christmas period.
Its trading statement reports group Christmas sales growth of 6.8% and gross profit growth of 8.2%, alongside the mandatory complaint about today’s “challenging UK retail market.” The update, which covers the 10-week period ending 31 December, also reported trading margins rose 0.4%, led by strong performance in Naked Wines, where sales grew 15.9%.
Not quite Majestic
This is good news given that the £181m group generates 30% of total annual sales during the key Christmas trading period. But there was one concern. While overall sales rose 1.5%, gross margins were down 1.2 percentage points on a year ago, which management blamed on “a very price promotional market.”
Group CEO Rowan Gormley reckons Majestic is well-positioned to survive the “revolution in retail,” although the stock is up just 0.4% on today’s results. Encouragingly, the group is expanding overseas with some success, with sales up 21% in the US and 14.8% in Australia. It’s now strengthening its focus on the US, “accelerating investment to capture the attractive growth opportunity.”
Majestic was punished after warning in November that sales growth would be flat this year, but the future now looks brighter, with City analysts predicting earnings growth of 39% in the year to 31 March 2020, and 38% after that. You can buy it at 15.7 times earnings, with a forecast yield of 2.7%. It depends how challenging you think the retail market is going to be.
FTSE 100 fashion and home products retailer Next knows all about challenging times, but is in full-throttle recovery mode right now, its stock leaping 20% in the past week. As Kevin Godbold explains, this was due to a surprisingly good trading update for the all-important Christmas period, with sales climbing 1.5% on last year.
This made up for a disappointing November with a 15.2% rise in online sales offsetting a 9.2% fall on the high street. There’s an interesting equation here. In the past, many retailers found that rapid online sales growth failed to compensate for falling high-street growth, because the increase came from a low base, while the fall came from a higher one. As online sales steadily grow, the balance is beginning to reverse, especially at Next, which now generates 70% of its profits online.
Would its online offering the so popular if it closed its stores and no longer had a public presence? I suspect not. Bricks & mortar stores may be a burden it must continue to carry.
Despite the recent surge, Next still trades at just 10 times earnings and offers a forecast yield of 3.4%, with dividend cover of 2.7. Earnings are forecast to rise 4%, 3%, and 3% over each of the next three years, which offers further encouragement. Next is showing the potential rewards from getting greedy when others are fearful.
harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.